[Madhusudan Chandarasekaran, CFA, FRMKeymaster]

Hi Aishwarya,

Thanks for the question. this is a tricky one.

You are correct to consider that paying the fixed rate (3.10%) and receiving the floating rate (initially 1.75%) would generally result i

Hi Aishwarya,

Thanks for the question. this is a tricky one.

You are correct to consider that paying the fixed rate (3.10%) and receiving the floating rate (initially 1.75%) would generally result in a loss for the fixed-rate payer, given the rates provided. However, the scenario described includes some nuances related to swap valuation and mark-to-market (MTM) calculations:

Key Details:

1. Swap Valuation at Inception: At inception, the present value of fixed and floating cash flows is set to zero when the swap rate (fixed rate) is determined.
2. After Six Months:
   • The fixed payment of 3.10% for the first semiannual period is known.
   • The floating payment for the first semiannual period is based on the GBP MRR of 1.75% at inception, which is also known.
   • No changes in future interest rate expectations means that the floating leg cash flows for subsequent periods are still expected to reset to the prevailing market swap rates.

Given that one negative value for ACE is taken out the remaining payments PV will have to be positive. So, The best answer is B:

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• This reply was modified 8 months ago by Madhusudan Chandarasekaran, CFA, FRM.